Jay Samit: 4 Reasons for a Startup to Turn Down Capital

Feb 9, 2015 4:57 pm ET

Jay Samit, serial entrepreneur: The biggest downside of raising too much capital is that it limits your exit options. Early stage venture-capital firms are taking huge risks with their limited partner’s money and expect outsized returns to justify the risk. Making three or four times on their investment isn’t usually enough to compensate for the investments they have to write off. So if you as a founder raise $10 million at a $20 million valuation and someone offers $40 million for your company, don’t be surprised if VCs turn down the base hit — they would rather have you swing for the fences toward a ten times multiple. And even if you can convince the board on a lower return, the VC’s contractual preferences may give them a return greater than their percentage of ownership, leaving little left over for you and your team. …